Fundamental Analysis: Tata Consultancy

Services Limited (TCS)

May 15, 2020 ─

Ayan Banerjee Roll No. 16EC8020 Stock Market and Investment Management (MS842) Assignment Part-I

Company Background and Product/Services Tata Consultancy Services Limited (TCS) is the largest Indian multinational information technology (IT) service and consulting company, and is headquartered in , Maharashtra, . It is a subsidiary of Tata Group and operates in 149 locations across 46 countries.

TCS is the largest Indian company by market capitalization. Tata consultancy services is now placed among the most valuable IT services brands worldwide. It is the world's largest IT services provider. In 2018, it is ranked 11th on the Fortune India 500 list. In April 2018, TCS became the first Indian IT company to reach $100 billion market capitalization (this makes it a large cap company), and second Indian company ever (after achieved it in 2007) after its market capitalization stood at ₹6,79,332.81 crores ($102.6 billion) on the BSE (formerly Bombay Stock Exchange).

Sales Break up Net sales breakdown by activity –

 IT services (98.7%): consulting and engineering services, solutions and systems integration, management applications development, outsourcing services, etc.;  Sale of IT equipment and software licenses (1.3%)

Net sales break down by market – Sales Breakdown by Activity  Bank-financial services insurance (BFSI) (30.5%)  Retail and consumer packaged goods (15.2%)  Communication and media (7.0%) Sales of IT Equipme  Manufacturing industry (9.9%) nt &  Life sciences and healthcare (8.3%) Software Licenses  Technology and services (8.6%) and, 1%  Others (20.5%).

Net sales are distributed geographically as follows –

 India (5.7%),  Americas (52.3%),  Europe (30.6%) and,  Others (11.4%). IT Services 99%

SALES BREAKUP (BY SALES BREAKUP (BY Technolog y & VERTICALS) GEOGRAPHY) Others RoW Services 21% 9% 11% Life India Sciences 6% and Healthcar e 8% BFSI Americas Communic 30% 52% ation & Media Europe Manufact 7% 31% uring Retail &

Industry CFG 10% 15%

Shareholding Pattern Sl No. Name No. of Equities % Shareholders 1 Promoter & Promoter Group 5 2,70,35,42,000 72.05% 1.1 Tata Sons Private Limited 1 2,70,24,50,947 72.02% 1.2 Tata Investment Corporation Limited 1 10,36,269 0.03% 1.3 Limited 1 46,798 0.00% 1.4 Tata Industries Limited 1 7,220 0.00% 1.5 The Tata Power Company Limited 1 766 0.00% 2 Institutions 1477 89,09,31,476 23.74% 2.1 Mutual Funds/UTI 41 9,56,98,803 2.55% 2.2 Alternate Investment Funds 24 18,20,360 0.05% 2.3 Foreign Portfolio Investors 1346 59,06,21,054 15.74% 2.4 Financial Institutions/ Banks 21 18,49,839 0.05% 2.5 Insurance Companies 45 20,09,41,420 5.36% 2.5.1 Life Insurance Corporation of India 1 15,75,32,346 4.20% 3 Central Govt./State Govt.(s)/President 7 24,20,388 0.06% of India 4 Non-institutions 8,57,336 15,54,90,842 4.14% 4.1 Individuals 853942 13,14,89,806 3.50% 4.2 Others 3394 2,40,01,036 0.64% As of March 31, 2020 Source: TCS Quarterly Report

Shareholding Pattern over Quarters

Name Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Promoter & Promoter Group 72.00% 72.05% 72.05% 72.05% 72.05% Institutions 23.60% 23.74% 23.74% 23.93% 23.74% Central Govt./State Govt.(s)/President 0.00% 0.06% 0.06% 0.06% 0.06% of India Non-institutions 4.40% 4.15% 4.17% 3.95% 4.14%

Source: TCS annual & quarterly reports

Shareholding Pattern

Non-institutions Government 4% 0%

Institutions 24%

Promoter & Promoter Group 72%

Past Data Analysis Profit & Loss Account In crore ₹ FY 2020 FY 2019 FY 2018 FY 2017 FY 2016 INCOME Software Services & 129,565 121,033 95,150 90,791 85,864 Operating Revenues Sale of Equipment & 1,741 2,137 2,206 1,902 0 License Operating Income 131,306 123,170 97,356 92,693 85,864 EXPENDITURE Raw Material 18 40 85 94 39 Consumed Employee Cost 64,906 59,377 51,499 48,116 42,420 Salaries, Wages & 59,140 54,080 47,004 43,876 38,708 Bonus Contributions to EPF 4,020 3,665 3,165 2,984 2,710 & Pension Funds Wheeling & 1,746 1,632 1,330 1,256 1,002 Transmission Charges Recoverable Cost of Software 1,596 1,963 1,920 1,664 1,691 Development & License Cost General & 25,144 23,363 12,872 12,841 12,013 Administration Expenses Other Operating 2,307 3,463 3,174 2,890 2,646 Expenses Total Expenditure 93,953 88,206 69,551 65,604 58,810 Operating Profit 37,353 34,964 27,805 27,089 27,054 (excluding other income) Other Income 8,082 7,627 5,803 4,568 3,757 Total Revenue 139,388 130,797 103,159 97,261 89,621 (including other income) Earnings before 45,435 42,591 33,608 31,657 30,811 Interest, Depreciation, Tax & Amortization (EBITDA) Interest 743 170 30 16 13 Profit Before Tax & 44,692 42,421 33,578 31,641 30,798 Depreciation Depreciation 2,701 1,716 1,647 1,575 1,459 Profit Before Tax 41,991 40,705 31,931 30,066 29,339 (PBT) Total Tax Expenses 8,731 10,640 6,690 6,413 6,264 Profit After Tax 33,260 30,065 25,241 23,653 23,075 (PAT) No of Shares 375,23,84,706 378,97,49,350 192,45,92,806 197,04,27,941 197,04,27,941 Weighted average 375,23,84,706 378,97,49,350 384,91,85,612 394,08,55,882 394,08,55,882 number of equity shares EPS (in ₹) 88.64 79.34 65.57 60.02 58.56 Share Price (end of 1,823.05 1,956.12 1,372.97 1,127.59 1,124.61 Year) Source: TCS Annual & Quarterly Reports Revenue, EBITDA, PAT (in crore ₹) and EBITDA Margin Trend (in %)

160000 40

139388 38 140000 130797 36 120000 103159 34.38 34 97261 100000 32.6 32.56 32.58 32.55 89621 32

80000 30

28 60000 45435 42591 26 40000 33260 30065 33608 31657 30811 25241 23653 23075 24 20000 22

0 20 FY 2020 FY 2019 FY 2018 FY 2017 FY 2016

Total Revenue EBITDA PAT EBITDA Margin Trend

EPS Trend (in ₹)

100 88.64 90 79.34 80

70 65.57 60.02 58.56 60

50

40

30

20

10

0 FY 2020 FY 2019 FY 2018 FY 2017 FY 2016

EPS (in Rs.)

Balance Sheet FY FY FY FY FY 2016 In crore ₹ 2020 2019 2018 2017

EQUITIES AND LIABILITIES SHAREHOLDER'S FUNDS Equity Share Capital 375 375 191 197 197.00 Total Share Capital 375 375 191 197 197.00 Reserves and Surplus 73,993 78,52 75,67 77,82 64,816.0 3 5 5 0 Total Reserves and Surplus 73,993 78,52 75,67 77,82 64,816.0 3 5 5 0 Total Shareholders’ Funds 74,368 78,89 75,86 78,02 65,013.0 8 6 2 0 NON-CURRENT LIABILITIES Long Term Borrowings 0 33 39 44 50.00 Deferred Tax Liabilities [Net] 347 339 424 314 366.00 Other Long Term Liabilities 6,234 1,334 643 638 639.00 Long Term Provisions 0 0 26 39 40.00 Total Non-Current Liabilities 6,581 1,706 1,132 1,035 1,095.00 CURRENT LIABILITIES Short Term Borrowings 0 0 181 200 113.00 Trade Payables 8,734 7,692 4,775 4,190 5,370.00 Other Current Liabilities 15,057 11,03 8,931 6,245 5,711.00 0 Short Term Provisions 235 174 171 66 115.00 Total Current Liabilities 24,026 18,89 14,05 10,70 11,309.0 6 8 1 0 Total Capital And Liabilities 104,97 99,50 91,05 89,75 77,417.0 5 0 6 8 0 ASSETS NON-CURRENT ASSETS Tangible Assets 16,903 9,522 9,430 9,214 9,056.00 Intangible Assets 0 139 10 17 24.00 Capital Work-In-Progress 0 834 1,238 1,477 1,640.00 Fixed Assets 16,903 10,49 10,67 10,70 10,720.0 5 8 8 0 Non-Current Investments 2,189 2,189 2,186 2,201 2,229.00 Deferred Tax Assets [Net] 2,219 2,097 3,051 2,447 2,530.00 Long Term Loans And Advances 2 2 1,503 6 2,432.00 Other Non-Current Assets 4,468 5,685 5,416 5,954 6,129.00 Total Non-Current Assets 25,781 20,46 22,83 21,31 24,040.0 8 4 6 0 CURRENT ASSETS Current Investments 25,686 28,28 35,07 40,72 21,930.0 0 3 9 0 Inventories 5 10 25 21 9.00 Trade Receivables 28,660 24,02 18,88 16,58 19,058.0 9 2 2 0 Cash And Cash Equivalents 4,824 8,900 3,487 1,316 4,806.00 Short Term Loans And Advances 7,270 7,018 2,793 2,704 2,523.00 Other Current Assets 12,749 10,79 7,962 7,090 5,051.00 5 Total Current Assets 79,194 79,03 68,22 68,44 53,377.0 2 2 2 0 Total Assets 104,97 99,50 91,05 89,75 77,417.0 5 0 6 8 0 OTHER ADDITIONAL INFORMATION CONTINGENT LIABILITIES, COMMITMENTS Contingent Liabilities 0 4,721 13,94 16,25 19,695.4 9 9 2 CIF VALUE OF IMPORTS Raw Materials 0 0 0 0 27.66 Stores, Spares And Loose Tools 0 0 0 0 0.31 Trade/Other Goods 0 0 768 561 0.00 Capital Goods 0 0 0 0 474.13 EXPENDITURE IN FOREIGN EXCHANGE Expenditure In Foreign Currency 0 0 33,01 31,55 29,554.5 4 3 3 REMITTANCES IN FOREIGN CURRENCIES FOR DIVIDENDS Dividend Remittance In Foreign Currency - - - - 1,366.16 EARNINGS IN FOREIGN EXCHANGE FOB Value Of Goods - - - - 81,193.8 5 Other Earnings - - 92,25 86,37 690.88 8 0 BONUS DETAILS Bonus Equity Share Capital - 343 151 156 155.90 NON-CURRENT INVESTMENTS Non-Current Investments Quoted Market - - - - - Value Non-Current Investments Unquoted Book - 2,189 2,186 2,201 2,228.28 Value CURRENT INVESTMENTS Current Investments Quoted Market Value - 28,21 25,97 21,99 20,253.6 8 2 9 5 Current Investments Unquoted Book Value - 2,252 9,101 18,73 1,675.44 0

Ratio Analysis FY FY FY FY FY Unit 2020 2019 2018 2017 2016 Ratios - Financial Performance Employee Cost / Total Revenue 46.56 45.40 49.92 49.47 47.33 % Raw Material Consumed / Total 0.01 0.03 0.08 0.10 0.04 % Revenue Cost of Software Development & 1.15 1.50 1.86 1.71 1.89 % License Cost / Total Revenue General & Administration 18.04 17.86 12.48 13.20 13.40 % Expenses / Total Revenue Other Operating Cost / Total 1.66 2.65 3.08 2.97 2.95 % Revenue Total Cost / Total Revenue 67.40 67.44 67.42 67.45 65.62 % EBITDA / Total Revenue 32.60 32.56 32.58 32.55 34.38 % PBT / Total Revenue 30.13 31.12 30.95 30.91 32.74 % PAT / Total Revenue 23.86 22.99 24.47 24.32 25.75 % Ratios - Growth Total Revenue 6.57 26.79 6.06 8.52 14.83 % EBITDA 6.68 26.73 6.16 2.75 20.85 % PAT 10.63 19.11 6.71 2.50 19.83 % Ratios - Per Share EPS - adjusted for Bonus 88.64 79.34 65.57 60.02 58.56 ₹ P/E Ratio (end of year) 20.57 24.65 20.94 18.79 19.20 Times DPS 73.00 30.00 50.00 47.00 43.50 ₹ DPS - adjusted for Bonus 73.00 30.00 25.00 23.50 21.75 ₹ Source: TCS Annual & Quarterly Reports

Industry Prospects and Critical Success Factor TCS’s main business is providing services to IT various companies of industries like banking, manufacturing, retail etc. The following table gives a trend of previous years:

Vertical (%) FY 2020 FY 2019 YoY CC Growth Banking, Financial Services and Insurance 30.5 31.1 5.2 Retail and CPG 15.2 15.4 5.5 Manufacturing 7 6.9 9.8 Life Sciences & Healthcare 9.9 9.9 7.3 Technology & Services 8.3 7.5 16.8 Regional Markets & Others 8.6 8.8 5 Others 20.5 20.4 7.5 Source: TCS annual & quarterly reports

Clearly, the company’s business depends on various business’ performance. The other businesses prosper, TCS will get new clients and it will prosper as well.

Clients Contribution FY 2020 FY 2019 FY FY 2017 FY 2016 2018 US$ 1m+ Clients 1072 1008 - - - US$ 5m+ Clients 565 532 - - - US$ 10m+ Clients 391 371 - - - US$ 20m+ Clients 240 215 - - - US$ 50m+ Clients 105 99 97 84 73 US$ 100m+ Clients 49 44 38 35 37 - Data not available Source: TCS annual & quarterly reports

From the table above it may be observed that clients $100M+ up by 5; $50M+ up by 6; $20M+ up by 25; $10M+ up by 20 & $5M+ up by 33 from FY 2019 to FY 2020. More high valued clients help to boost revenue of the company.

Economic Variables factors affecting the company Global Economy & Effect of COVID-19

Geography (%) FY 2020 FY 2019 YoY CC Growth Americas North America 50.4 51.0 4.3 Latin America 1.9 2.0 5.8 Europe UK 15.9 15.6 10.4 Continental Europe 14.7 14.1 14.6 India 5.7 5.7 6.8 Asia Pacific 9.3 9.5 6.2 MEA 2.1 2.1 6.5 Total 100 100 7.1 Source: TCS annual & quarterly reports

TCS primarily gets revenue from Americas and Europe and thus the revenue is dependent on the performance of the businesses in these regions. Due to recent COVID-19 pandemic, the GDP growth will be -5.9% and -7.1% in the United States and Europe respectively. This negative growth is much lower than the expected growth. This will hamper the revenue growth of the company. However, the economy is expected to recover in 2021 with expected GDP growth of 4.7% and 4.8% of the United States and Europe respectively.

The BFSI sector has been severely impacted given their secure business model in nature, and thus it is very hard to switch to 100% remote model.

Life Sciences and Communications are relatively the lesser impacted. But there are also pockets of weakness. For example, in Life Sciences, the cancellation of elective surgery is having quite a lot of impact on many sub-segments like medical devices and even certain specialty hospitals and facilities like that. However, they are the most resilient and likely to remain the most in the near-term in this current crisis.

Impact on communications and media is a mixed bag. While there are strong demand drivers with this whole shift to a digital operating model and which will be a long-term shift and will continue to benefit all forms of capacity providers. But, on the media side, there is significant impact. Cancellation of large sporting events, Olympics and other sporting events, is having significant subscription as well as advertising revenue impact. Closure of amusement parks and other such facilities is also having a lot of impact. Closure of studios and the lack of new content will have downstream impact. So, Communications and Media is a more mixed one.

Given that travel, transportation and hospitality sub-vertical has been severely impacted, the resulting impact on retail will also be severe.

Manufacturing industry is also impacted severely due to closure of manufacturing plant and in most cases they cannot be done in remote.

The impact in those verticals will also impact the revenue of the company.

New Customers

This section can be divided into 2 subsections – new clients and organizations using software built by TCS.

 New Clients

As shown in a previous table TCS has added 64 new clients to its portfolio. TCS has also seen an all-time high order book of $8.9 billion in Q4. This will partially help compensate the revenue loss due to the COVID-19.

At the same time, TCS continues to add new clients in FY 2021, for example Israel’s first fully digital bank and leading Amway’s IT infrastructure transformation.

 New Software

New software like WaferWise™ for semiconductor industry will help boost the company’s revenue.

At the same time, already published software continue to be adopted by various organizations around the world, for example cognitive automation software Ignio™ has seen 11 new wins and 13 go live, financial software BaNCS™ has seen 9 new wins, the Quartz Blockchain Solution had 3 new wins. In the Algo retailing space, the company had 1 go live each for Optumer™ and OmniStore™. In Life Sciences, Advanced Drug Development suite had 3 go lives. Lastly, TCSHOBS™, SaaS platform for communication service providers had 2 new wins and 1 go live.

Tax

Indian statutory tax rate for TCS is 34.94%. The tax rate is expected to stay same for the coming years.

FY 2020 FY 2019 Profit before taxes (PBT) 41,991 40,705 Indian statutory tax rate 34.94% 34.94% Expected income tax expense 14,673 14,224 Tax effect of adjustments to reconcile expected income tax expense to reported income tax expense Tax holidays (4,856) (4,735) Income exempt from tax (14) (21) Undistributed earnings in branches (15) 299 Tax on income at different rates (300) (403) Tax pertaining to prior years (877) 1,271 Other (net) 120 5 Total income tax expense 8,731 10,640 Total income tax expense / PBT (%) 20.79% 26.14% Source: TCS Annual Report

Assumptions  We assume that the economy will recover after Q2 and will have a positive GDP growth in the United States and Europe.  The company has no expansion plan as of 2020 Q4, so low fixed asset growth rate is assumed.  Employee cost is expected to go down in the coming years as an effect of various measures taken by the company.  Rest of the assumptions have been stated in the following table.

Projected Income Statement FY 2020 FY 2021E FY FY 2022E 2023E INCOME Total Revenue 139,388 144,964 156,561 172,217 EXPENDITURE Raw Material Consumed 18 14 16 17 Employee Cost 64,906 66,683 70,452 75,775 Cost of Software Development & License Cost 1,596 1,740 1,566 1,722 General & Administration Expenses 25,144 26,093 28,181 30,999 Other Operating Expenses 2,307 2,464 2,662 2,928 Total Expenditure 93,953 96,995 102,876 111,441 Earnings before Interest, Depreciation, Tax & Amortization (EBITDA) 45,435 47,968 53,685 60,775 Interest 743 1,033 1,343 1,611 Profit Before Tax & Depreciation 44,692 46,935 52,342 59,164 Depreciation 2,701 3,046 3,229 3,422 Profit Before Tax (PBT) 41,991 43,890 49,113 55,741 Total Tax Expenses 8,731 9,217 10,314 11,706 Profit After Tax (PAT) 33,260 34,673 38,799 44,036 EPS (in Rs.) 88.64 92.41 103.41 117.37 ASSUMPTIONS Total Revenue Growth (%) 6.57 4 8 10 Raw Material Consumed / Total Revenue (%) 0.01 0.01 0.01 0.01 Employee Cost / Total Revenue (%) 46.56 46.00 45.00 44.00 Cost of Software Development & License Cost / Total Revenue (%) 1.15 1.20 1.00 1.00 General & Administration Expenses / Total Revenue (%) 18.04 18.00 18.00 18.00 Other Operating Expenses / Total Revenue (%) 1.66 1.70 1.70 1.70 Fixed Asset Growth Rate (%) 61.06 6.00 6.00 6.00 Total Fixed Asset 16,903 17,917 18,992 20,132 Depreciation / Total Fixed Asset (%) 15.98 17.00 17.00 17.00 Effective Tax Rate (%) 20.79 21.00 21.00 21.00 Liabilities Growth Rate (%) 49.00 35.00 30.00 20.00 Total Liabilities 30607 41319.45 53715.29 64458.34 Interest / Total Liabilities (%) 2.43 2.50 2.50 2.50

Target Price Assuming total no. of equities of shares to be constant in coming 3 years, i.e., around 375.2 crores: Projected EPS can be calculated as: Projected EPS = Profit After Tax / Total no. of equities of shares. So, Target Price = Projected EPS * PE Ratio

FY 2020 FY 2021E FY 2022E FY 2023E Projected EPS 88.64 92.41 103.41 117.37 PE Ratio 20.57 20.25 20.00 20.00 Target Price 1823.05 1871.33 2068.19 2347.32 Growth (%) 2.65 10.52 13.50

Valuation Market Cap 713,253.28 P/E 21.46 Book Value (₹) 198.19 (Cr. ₹) Dividend (%) 7300 Market Lot 1 Industry P/E 18.55 EPS (TTM) 88.64 P/C 19.85 Price/Book 9.59 Dividend Face Value Deliverables 3.84 1 35.31 Yield.(%) (RS) (%) As of May 14, 2020

FY 2020 FY 2021E FY 2022E FY 2023E P/E Ratio 88.64 92.41 103.41 117.37 Capitalization (in crore ₹) 678,612 696,583 769,865 873,766 Capitalization / Revenue 4.87 4.81 4.92 5.07 EBITDA / Revenue (%) 32.60 33.09 34.29 35.29

The profit in near term is low, however in long-term if one holds the company’s share, she can make a significant amount of profit. Thus, we rate this company’s share as HOLD.